Daniel Mahoney is a founding partner of Mahoney Liotta, one of Mongolia’s most experienced law firms, dealing with a full range of corporate matters and government matters.

He speaks about the ever-present risks of Mongolian taxation and the underlying causes. There is an interesting aside about the composition foreign investors and how they have changed over time in response to the regulatory environment. This interview also provides a glimpse into the nature of mining investment community.

Interview Transcript

Enkhzul Orgodol: Mr Daniel Mahoney is a founding and managing partner of Mahoney Liotta law firm based in Ulaanbaatar. Daniel is a lawyer by training and has almost 20-year experience of providing legal and business advisory to international and national companies and successfully doing business in Mongolia. Dan, welcome to the show.

Daniel Mahoney: Thank you.

Enkhzul Orgodol: In one of your company profiles, it’s stated that many clients may not fully understand the complexities and difficulties unique to the development of Mongolia. Please specify some of these complexities and difficulties you’re talking about in your statement.

Daniel Mahoney: I guess mainly as lawyers we’re talking about the development of the legal system in Mongolia. We opened our firm in 1997, so that was just a few years after the collapse of communism and the establishment of market economy and market-based laws in Mongolia. At the time, all these laws were new, and the infrastructure, the regulators, and the courts and everything was new. That’s I think probably one very unique thing about Mongolia for foreign investors looking in Mongolia.

Enkhzul Orgodol: Right, but since your establishment, it’s been almost … almost, it’s actually exactly been 20 years. Which do you see in terms of the development? What do you see? Have you seen much progress or do you think there’s still lot of areas that need to be improved?

Daniel Mahoney: There’s areas that need to be improved but there has also been a lot of progress, of course. In 1997 when we first came, there was a property registration office was set up to register ownership of apartments, but that was about it. Now they’ve just established a new system to register other pledges of other types of collateral. The regulators have gained a lot of experience. The securities regulators, the FRC, the banking regulators. Everybody in 20 years of work has gained a lot of experience as have our competitor law firms.

Enkhzul Orgodol: Right. Could you name some specific areas, which still need to be improved you think?

Daniel Mahoney: I think it’s … I would say probably the tax. Tax is a difficult area where it’s still investors and not only investors, but Mongolian business people have a difficult time due to lack of consistency, and lack of detailed rules, and ad-hoc administration by different tax offices, different officers would apply law in a different way. It’s very difficult for business owners, and investors, business owners, Mongolian as well as foreign to really understand what they’re supposed to do and to follow the rules.

Enkhzul Orgodol: I see. Yeah, in one of our previous interviews we talked to a tax expert, Mr. Onchinsuren. She also said one of the difficulties of the business in Mongolia might be the number of these state organizations that may need more clarity in terms of their roles and better arrangement even among themselves. That’s basically what you’re talking about with regard to tax.

Daniel Mahoney: Yeah, with regard to tax and yeah, other organizations as well as training, I think, of staff. You know, at election time, there’s a lot of turnover in departments, and we’ve talked for years about having a more formal civil service in Mongolia, where people don’t change, their jobs aren’t changed because of change of elections, and they develop some expertise in the area within the different departments and authorities. Because now, sometimes they’ll change and people aren’t trained. It’s not always their fault if they actually are trying to apply these laws and regulations, but they haven’t been trained. There is a difficulty many times, faced, yeah.

Enkhzul Orgodol: Of course. Having maybe improperly or inadequately trained civil servants at these public organizations, of course, would be quite time-consuming and troublesome for the business as I understand. Is it correct? Is that where the business is having the most difficulties with regard to the inconsistent civil servants.

Daniel Mahoney: Yes. I think it’s … now speak for example foreign investors, we do a lot of representing foreign investors investing in Mongolia. A lot of the risks in Mongolia could be addressed through contracts, and quite frankly, offshore arbitration, or providing agreements with the partners to address issues but one thing you can’t avoid is dealing with the tax authority and if you have a dispute with the tax authority, it goes to Mongolian court. This is probably the main … you can have a successful business. You can make profits, but sometimes the more profits you make, then the more interest the tax people have. You can’t do business in Mongolia without dealing with the tax authorities.

Enkhzul Orgodol: Exactly. Based on my previous experience, what I understood was, of course, we have the Mongolia law on one hand but if Mongolia is a party to international agreements that are related to that specific area of law, then the international agreements or international … the legislation would prevail the national laws. That’s how I understood. You’re saying that it does not apply to tax-related laws.

Daniel Mahoney: Sure, there’s international agreements on tax as well. There’s many different areas. Yes, under Mongolia law, Mongolia law is clear and actually, the regulators are pretty faithful in applying it in the courts that that international agreement will prevail. Of course, there’s no international agreement about income tax of a company operating in Mongolia. That’s solely a Mongolian law issue, so you’re solely subject to Mongolia law as a business operating in Mongolia.

Enkhzul Orgodol: I see. Then what would be your top let’s say three, four advice to your clients or anyone who is interested in doing business in Mongolia in tackling or sort of, how would I say, at minimizing the risks, such risks you mentioned?

Daniel Mahoney: Yeah, I mean, I think probably the advice is similar to other country. The main one, the first one is to have a good Mongolia partner because it’s really difficult as foreign investors. It depends on the size of the project, also. For somebody like Rio Tinto who is a huge multinational, it’s a little bit different than a small investor from United States or from Australia. For the smaller projects, medium size projects it’s really essential to have a reliable Mongolia partner, and it’s difficult to find a good partner.

Enkhzul Orgodol: Yeah, that’s what I’ve been hearing.

Daniel Mahoney: It’s possible. They just have to … I guess the first advice is, yeah, is to be careful, and investigate and do your due diligence on your partner, but find a good partner. There are, of course, there are good partner.

Enkhzul Orgodol: Right, and what else would be your reply? Find a good partner, also …

Daniel Mahoney: I think the other … not to go back to the tax point is … but the financials is to monitor closely the business here in Mongolia, and to keep track on a constant basis what’s going on. Another problem you see a lot of is to have a good understanding of what you’re doing, so language is a problem, of course, for a foreign investor now we’re talking about They need to have essential documents that they’re asked to sign or submit, file, translate it. They need to have an understanding. Either word for word translation or explain very clearly to them by their staff or by their advisors or something. I think it’s just very important.

We’ve seen as lawyers, we’ve seen many problems over the years where clients come and say, “Well, that’s not what I understood we were doing at the time and now there’s a problem.”

Enkhzul Orgodol: Yeah, I keep hearing, especially because as you said, Mongolia market economy has been developing just over 20 years for now, so there is still a lot of areas that need to be improved in terms of meeting the internationally accepted standards. Some of these sectors, economic sectors are quite new to Mongolia, especially the services or the special, professional services. That’s why a lot of the legal language that are used in English have not been introduced in Mongolian language maybe until now or until quite recently. How do you tackle with that? I mean, how do you go around that as a law firm?

Daniel Mahoney: Yeah, well, I mean, we have, obviously, I’m American, obviously I’m a foreigner but I’m an American so I speak English. Since we were founded, we’ve always had Mongolian partners and a lot of Mongolian lawyers working for us. What we try to do is to understand within the firm, the legal concept that we’re talking about, and then to get it translated into Mongolian either as a word or as a concept. If there’s a defined term or an accepted international standard term, we as lawyer, offshore lawyers, of foreign lawyers, if we understood the term, we would try and explain it, we would discuss. Then our Mongolian lawyers will help us put it in terms that would be understandable in Mongolian.

Enkhzul Orgodol: Right. You said when you set up your own company, you also partnered the Mongolians. What were your main, how would I say it, the criteria or the kind of requirements that you saw in your own local partners?

Daniel Mahoney: Well, actually, I had met our original partner in Washington DC. We worked together in a law firm in Washington.

Enkhzul Orgodol: I see, so you knew-

Daniel Mahoney: I knew him before we came and actually, he invited me to Mongolia. That’s how I arrived here.

Enkhzul Orgodol: Maybe speaking based on your clients or other experts doing business in Mongolia, the kind of quality they seek in their local partners, what did you find the most common?

Daniel Mahoney: Yeah, it is in the earlier … the most common is that they met somebody, that the foreign investor met a Mongolian, their Mongolian partner somewhere, often in Hong Kong, Japan, Singapore.

Enkhzul Orgodol: Mostly through personal connections.

Daniel Mahoney: Through personal connection for the smaller projects. Of course, the larger projects it’s a little bit different.

Enkhzul Orgodol: They would more look at the professional background, etc..

Daniel Mahoney: Yeah, they would. I mean, organizations like BCM or check with, many times people come, potential clients and ask us. They ask us about this is our potential partners. Do you have any comments? Ask around and get references, and check with people that you trust, because you know Mongolia is very small and everybody knows everybody else. Even if not personally or directly, they know of them or they know somebody who knows of them. It’s not that hard.

Enkhzul Orgodol: Right, exactly. Okay, when I was looking at your websites, the company website that I noticed that you have very wide range of services you’re offering through your firm. Of course, I mean, I think that the number of years you’ve been in the country justifies that long list of services that range from registration and regulatory affairs to export customs and trade, etc.. I want to point out the Goldman relations, which actually you pointed out earlier in the discussion as well in terms the inconsistent maybe in the civil service etc.

Could you share some of the advice that you provide to your clients under the government relation section because some of the viewers of our video, the interview would be ones I don’t think who would have the maybe the necessary , who would necessary have the capacity to have a law firm like yourself as their, the professional helper. Could you share some of the insights that could fall under this category?

Daniel Mahoney: I mean, mainly, I guess, in our website, what that means is that we assist our clients primarily in negotiating contracts with the government party, either the government is a contract party, for example, in some of the larger mining projects where the government is actually a shareholder, or the government is the regulator. We would be discussing and meeting with the regulators on behalf of clients. This is what we mean by government relations. We also help just generally, the business community and lobbying for new laws where new laws are published. Hopefully, they’re published in draft form first, and we have a chance to review the draft and then to make some suggestions. That’s probably what we would cover by government relations.

Enkhzul Orgodol: How has the government been? How responsive has the government been in terms of accepting the kinds of suggestions from business community?

Daniel Mahoney: You know, it changes from government to government. Originally, when we first came and I think generally, to be honest, in the late ’90s, government was very open to suggestions and discussions with foreign investors or with. At the time, there were few foreigners actually living full times. Myself, and I had another American partner, and we had a lot of discussions with the parliament members and the government regulators about questions they had.

Then, as the economy grew and particularly the commodity prices went up and the government became, seemed less interested in getting advice because there was so much, I think they took the view that there was so much value in Mongolia that the investors, that they had the upper hand basically and that investors would, they didn’t need to cater to investors, investors needed to cater to them if they wanted to get a gold mine, or a copper mine, or whatever. Of course, in the last few years, that has kind of backfired. Now, the current government is very open.

Enkhzul Orgodol: I see. You see some promising results. You’re expecting some promising results from the current government. Could you name some of the positive actions that the current government has taken that has given you this kind of positive outlook?

Daniel Mahoney: Sure. I think just being open to discussions. All the time over the years, of course, all the government leaders will come to invest. They’ve always go to investor conferences and say, “Yes, we’ll listen to you. If you have any problems, come speak to us.” Then when you actually try and go to speak to the sometimes it’s not so easy.

This government has been open and aggressive in its listening comments, and the Prime Minister, the Speaker, other ministers have come regularly to monthly investor meetings and have presented their platform. They listen to issues and they’ve reacted and so far positively. There’s a lot of changes. There are a lot of proposed laws, of course, under consideration. We’ll see what happens, including mining law, labor law, and some other issues. We together with some others in the business community are providing comments on those laws. We’ll see what happens.

Enkhzul Orgodol: Exactly, yeah, fingers crossed. I see. On your client portfolio what I understood, when I was also speaking to some of the not similar, but professional services firms like the investment banking or the tax, they were sort of sharing insights in terms of their client portfolio because they were saying that how their client portfolio looks like at the moment can be reflecting of the current economic sector, which sectors is doing well, which sector is attracting more investors, which sector has more trends etc., is more tending, etc.. Just to understand this kind of big picture, could you share some of the insights from your client portfolio, any dominant country in the portfolio or any dominant sector you see?

Daniel Mahoney: Mining has always been in 20 years was historically the dominant sector, and it was what was bringing in all the investment into Mongolia. Then, when that cash went into the economy, it went into the real estate and into banking. Those were the key sectors. We’ve represented clients from all countries. Probably if you name a country, we’ve worked with them. In the early years, there was a lot of Canadian investment into mining, into exploration. Later became more Australian because that’s where the money was raised on the stock exchange in Australia say five, six years ago.

Recently, in the last three or four years, unfortunately, there’s been minimal little investment in the exploration side of mining so a lot of that business has dried up. In the last few years, it’s been actually a lot of infrastructure work, and now power projects, and renewable power projects. That’s been the focus probably, at least for our business in the last two to three years.

Enkhzul Orgodol: In terms of the mining, is it mostly gold and copper, or any other specific type of mining sector that Mongolians are not very familiar with, but the foreigners are looking to explore in Mongolia.

Daniel Mahoney: Generally, I think mining companies and investors are interested in anything, but of course, coal was really hot for a while and now the market’s fallen off the last three or four years. Coal had a, in early years, there was very little interest in coal, and then there was a three or four years previous when coal prices went way up, and there was a lot of investment and activity in the coal sector. I think throughout, gold is always interest always, and I think always will be. Copper is the same. I think the long-term prospects for copper.

Uranium has always been here and there’s always been Uranium projects, but there’s always national security issues and because of the nature of Uranium, but there’s still a lot of interest in Uranium. Iron ore for a while there was some interest. It’s a little, I guess more difficult commodity because of the bulk to transport out of the country. It’s copper and gold are probably still today and probably for the future.

Enkhzul Orgodol: Besides this kind of, how do I say, what Mongolian government likes to call a strategic sector like the infrastructure, mining, and maybe even transport? They have transport, for example is next. Which kind of areas, maybe some niche areas of economy do you think Mongolia has the potential to develop more. I’m thinking of maybe organic farming or things like that, but just as a foreigner who’s lived in Mongolia for many years, which do you think, which sectors do you think have the more potential in the long run?

Daniel Mahoney: Yeah. I know and I think you probably know too, the government for a long time just talked about IT sector because that’s,I mean, there’s a lot of well trained, smart, young mostly I guess in technologies, young people, and it’s a good potential. The Mongolian situation has always been that the domestic market is kind of small.

Enkhzul Orgodol: Yeah, it is very small.

Daniel Mahoney: Yeah. You can’t, It doesn’t make economic sense to build a car assembly plant here, because the sales is too small and then the distance to other markets where you can sell is too far and too expensive. There’s lot of types of industries that wouldn’t work in Mongolia but IT would work.

Enkhzul Orgodol: You talked a lot about mining. When we talk about mining, most of the time people think mining as a high-risk, high-return type of business. Earlier you mentioned to me it’s not always the case. Could you explain a bit more on that?

Daniel Mahoney: Yes, what we were talking about was exploration, which is very high risk but very high return. This is I think maybe somewhat misunderstood in Mongolia that the exploration phase, which is when you’re just acquiring new ground which has never previously been mined, that there’s big risk. You have to go and spend a lot of money drilling, doing investigations. Say out of 10 companies, only one out of 10 will find anything. The other nine will go bankrupt.

These business are always financed on stock exchange and most in Toronto, in Canada, and then Australia, which are big mining company countries, a lot of experience of financing exploration work. Banks don’t lend to these companies because there’s a good chance that nine out of 10 of them will go bankrupt. There’s investors in Toronto, they are in Canada, and Australia that understand this business very well and they finance all this work.

This was in early years in Mongolia where a lot of the investment into Mongolia was these kinds of companies. If you’re the one out of 10 that find Oyu Tolgoi, then your investment goes 100 times. The investor knows if I invest in 10 and I go bankrupt, the 10th one will go 100 times so overall I make my money back.

These investors are a relatively small pool of investors and they know what’s going on around the world. For example, when in 2006 when the Windfall profits tax came in, this is when the investment from Canada just dried up. They started investing in companies working in Columbia and South America because they know which countries are friendly to investment and they know where, because it’s all high-risk money so they know. They’re very knowledgeable and they know, which countries are better and worth their investment.

Then Mongolia second, they came along with the strategic mine concept, which is basically like we say it’s like going to a casino that if you win the jackpot, then the casino owner comes and says, “Give me one-third for free.” How you’re going to be, put real high-risk money into my project, would I go to Mongolia where I have to give a third to the government or go to a country where I get to keep my jackpot. This is what’s really hurt investment at exploration stage in Mongolia.

Now, we also talk other projects like Oyu Tolgoi where the resource has already been discovered and developed. Once they did discover copper deposits, those continue and they’re still doing it now, drilling and trying to expand it. It’s going to be bigger. They don’t know how big it is but what they do know is that it’s big enough, and they know that how it sits in the ground, and how it’s structure, and the engineering to get it out of the ground, and they know they can make a profit by doing that.

They check all of these things, a company like Rio Tinto and they won’t invest until they eliminate, until they know that they won’t invest the big $10 billion to exploit the mine until they know all of these things. They know that the resource is there. They know how it’s structure, they know the engineering.

The other thing we were talking about is the political risk. They address that issue as well. Before they’re going to put 10 billion, they’re going to make sure that they’re covered by political risk, mainly that the government won’t confiscate their investment, or that the tax regime will stay stable. This was what was behind the stability agreement.

That’s not just for Mongolia. It’s for any developing country, they would want these kinds of assurances before they would invest. But, for them, it’s a, I mean, they’re still going to make good profit but it’s not like exploration company that makes 100 times what it’s invested, it’s more like if you invest 10 billion it will make a 25% return or something. Of course, it’s good profit.

Enkhzul Orgodol: I see. Can you elaborate a bit more on the stability agreement you just mentioned? What are the main inclusion out there, and how it’s protecting the investor, and how the government is practicing it in Mongolia?

Daniel Mahoney: Yeah, well, it’s mainly it’s fiscal stability but you know, it’s just taxes so the tax rate. If you invest in the project and tax laws, of course, can always be amended. Any law can be amended. What the government has done in the stability agreement at the time is to guarantee to Rio that the tax rates in effect and the taxes in effect at the time that the agreement was signed will stay stable. There’s some other, I mean, the documents is public record. It’s all over the internet, of course, and there’s stock exchange filings in Canada. It covers other things, labor, licensing, things like this, but it’s basically just to say you’ll have a stable environment going forward. Probably the most important thing is the fiscal and tax stability going forward.

Enkhzul Orgodol: Can this stability agreement be done by other investors as well or is it only for specific projects or where, you know, bringing over a specific number of investment?

Daniel Mahoney: Under the new investment law that was adopted a couple of years ago, I forget, 2014 maybe. Now, there’s two things. Any business can get a tax stability agreement. In the tax stability agreement, any large,I think it’s in certain sectors, really large, what you’re talking about, really multi-billion dollar project, you can get an investment agreement, which is similar to the stability agreement that you talk about which is broader coverage. Any investor can just the tax stability. If forget, there is a minimum investment. I forgot what the amount is, but a relatively small amount.

Enkhzul Orgodol: Right. It seems like the government has been giving significance to specific sectors like the mining, infrastructure. They’ve been trying to first attract investors through often this kind of incentives like the stability agreement, but at the same time, they’ve been trying to protect such sectors namely the strategic sectors, for example, right? With the current government, what do you think? They have to work as priority to fix the situation, to keep the right balance in terms of making Mongolia look like they are being very protective on the one hand, but on the other hand, they’ve been trying to be very open or very welcoming.

Daniel Mahoney: Well, there’s the strategic sectors I guess are mining, media, and finance, but most countries do have national security interests in the strategic sector. It’s not unusual for Mongolia to have that. I wouldn’t say that they’re giving advantages, or benefits, or special treatment to investors. Just, all investors want a stable environment and the fact of the matter is, United States is more stable than Mongolia. If you invested in the United States, you don’t expect or you don’t necessarily want or need a stability agreement because you know that the law, the legal environment will stay relatively stable. Sure, Congress can change tax rates and they do from time to time, but nothing like what the risk that they foresee in Mongolia. That’s why they needed the stability agreement to invest in a country like Mongolia.

For the government going forward as we talked before, investors need to see results because of what happened in the last three or four years with all the negative experiences of investors. Also, the government now has been going out and been telling everybody that those mistakes were in the past, lessons have been learned. Going forward we’re definitely committed to investment, we’re committed to rule of law, we’re committed to fairness. They just have to prove it now over time.

There’s huge potential in this country and there’s been unfortunately some missteps and over the last five, six years and mainly because of Mongolia was maybe too successful too quickly at the time as far as drawing investment in and things were going maybe too fast.

Enkhzul Orgodol: Since a 17% increase in GDP etc

Daniel Mahoney: All of it, yeah, just huge inflow of money into the country. Things were going really maybe too fast for the population, society to manage, to understand. When it’s 17% compounding year-on-year and there’s so many changes in Ulaanbaatar. You know, you’ve lived here, just physically, just explosion in building but also I think in society is really coming from Communist era and then slowly into market economy. Then all of a sudden sort of just thrown totally in such a rapid rate that it’s tough to adjust, and then maybe some mistakes made in adjusting to it.

Enkhzul Orgodol: Yeah, and we really hope to see the current government learning from the mistakes and doing what’s right in the future.

Daniel Mahoney: Not only government but the whole country, and society, and everybody understanding, maybe having better understanding of for example it’s not going to go up forever 17%. It’s going to maybe come down sometimes and to manage if for the long run, not the short run. More exposure, experience, education. More of just general concepts of a market economy.

Enkhzul Orgodol: Yeah, exactly. I think I should highlight something here as well, because what you said about finding qualified and reliable workforce is one of the top challenges in Mongolia. I think that really should make the general public and the professionals, aspiring professionals to reflect on themselves, and trying to, how would I say, build up more soft skills like trust building etc., it seems like.

Daniel Mahoney: Sure.

Enkhzul Orgodol: Okay, thank you very much for your insightful discussion, and all the best in your work. Thank you.